2008 Costly Year For Insurers
Insurers were hit hard in 2008 in both in their underwriting business and investment portfolio’s. Insured losses for catastrophe’s rose 7% this year according to Guy Carpenter Co., LLC, a leading reinsurance specialist.
“The record-setting Atlantic hurricane season — especially Ike and Gustav — is the big story and the primary driver of insured losses in 2008,” said Chris Klein, Global Head of Business Intelligence, Guy Carpenter. “At the same time, one should not overlook the role that other events, such as the China earthquake, California wildfires, and man-made catastrophes, played in making this an especially active year.”
The major insurance sub plot this year has been the spectacular losses by AIG and the record setting bailout that helped it avoid bankruptcy. A number of insurers have also purchased small regional banks in recent months in order to qualify for federal funding from TARP, the agency in charge of dispersing the $700 billion financial rescue package approved by Congress back in October.
Next year looks to be difficult as well for the insurance industry with Standard & Poors setting a number of sectors to a negative outlook for 2009. The nearly 40% decline in stock markets from their highs has put a big dent in the industry’s normally robust profits from investment income.
Despite the big drop in investment income, for the most part much of the insurance industry’s capital reserves are relatively safe, tied up mostly in investment grade bonds. The caveat though is that there are a few companies that still have significant holdings in mortgage backed securities purchased before their credit ratings plunged in the wake of the sub prime collapse.
Another consideration is that as the economy continues to worsen, losses from credit derivatives will continue to grow. These credit default swaps are major headache for the entire financial services industry, while they seemed like easy money during good economic times, the highly leveraged position have opened them up to potentially huge losses.
It is not out of the realm of possibility that the insurance industry will require it’s own form of bailout like the banking industry.
